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What is the point?

By Ziad Alaywan, P.E.

May 30, 2022

The Congestion Revenue Right (CRR) is a feature of the ISO markets that is used to hedge transmission congestion. The ISO allocates some CRRs to Load Serving Entities (LSEs) and auctions the remaining to all market participants. LSEs also receive auction revenues. Participants buy or sell CRRs corresponding to specific source/sink pairs in the annual auction. The ISO’s day ahead market calculates the congestion cost based on the difference in day-ahead market prices between two locations. In around 2018, ISO made a major modification in the CRR market after concluding that the CRR market from 2009 to 2017 was not working. As the DMM described CRR market results, “These results are not consistent with a well-functioning competitive market” DMM_ISO_2017,Page11 because, “Ratepayers paid over $1.4 billion to non-LSE CRR holders but received only $742 million in auction revenues” over 8.5 years. The ISO action was controversial, and many participants criticized such a blatant anti-market move which off course, FERC approved.

To prevent CRR auction participants from collecting auction proceeds that exceed congestion proceeds, the ISO introduced a post processing backdoor, called “revenue deficiency offset.” For instance, a year in advance, a supplier or Generator can purchase CRRs in the ISO auction and attempt to hedge its congestion cost by buying a point-to-point CRR from the generation injection point to the delivery at the hub. The generator will then receive the congestion rent between the two transmission points. If the auction payment equals the congestion rent, the hedge is perfect. The congestion rent is seldom equal to the auction price. The new market rule uses a complex reallocation after the fact to readjust the Settlements with market participants. This post processing could greatly modify the results of the ISO market in an unpredictable way. This is like buying a stock at a $1, selling it at $1.5 and receiving an invoice clawing back for $0.5 simply because you made money.

It also a short-sighted approach when analyzing a feature of the market, in this case CRRs, by making such a drastic change to alleviate a symptom that results in unintended consequences without assessing the overall market shortcomings that are causing the symptom of under-collecting CRR revenue, i.e., the fact that the congestion rent paid to CRR holders may be more than collected through the energy market. Why go through the annual allocation and auction followed by quarterly and monthly allocations and auctions, and calculation of daily congestion rents of over 1000 point-to-point transmission nodes if a such a capricious adjustment is needed after the fact that undoes the entire market. What is the point?

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